USD/CAD pulls back below 1.3800 ahead of US retail Sales data
- The Canadian Dollar trims some losses but remains trapped within previous ranges against the USD.
- Investors' hopes of a 25 Fed rate cut in September remain intact, which keeps the USD from rallying further.
- The Canadian Dollar is lacking bullish conviction, weighed down by a 10% decline on Oil prices.
The Canadian Dollar is regaining lost ground against the US Dollar on Friday. A moderate risk appetite is weighing on the Greenback although the CAD is lacking bullish conviction, which leaves the pair treading water around the 1.3800 level.
The US Dollar jumped on Thursday after the impact of strong PPI figures rattled investors’ hopes of Fed cuts triggered by the soft CPI data earlier in the week. Upside attempts, however, were capped at 1.3820.
The stronger-than-expected wholesale prices crushed hopes of a jumbo rate cut by the Fed in September. Still, the market is pricing a 90% chance of a quarter-point cut after the summer, which keeps the pair trapped within a 100-pip range above 1.3720.
The Canadian Dollar, on the other hand, remains unable to take any significant advantage from the US Dollar’s weakness. Oil prices have depreciated more than 10% since late July, reaching two-month lows at $62, which, in the absence of key Canadian data, is keeping the commodity-sensitive CAD on the defensive.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
